It’s Diwali and most of you would have brought home bonus cheques from your employer to ring in the festival. So while on the one hand, your income gets a boost, on the other, retail outlets, online portals and unmissable celebrity ads line up to stake a claim to your money. And then there are traditional demands: of buying gold, new clothes and fancy gifts. While festivals are about celebration, there is a real risk you may go overboard spending that bonus. And that would be an irony because Diwali is about welcoming ‘Lakhsmi’ or wealth home.
Good money habit can stop us from going overboard. So as you get ready to venerate the goddess of wealth in spirit, it’s time to put that worship into practice. These five money resolutions will help you stay the course.
Household money can broadly be divided into three buckets: mandatory expenses, savings and discretionary expenses. Mandatory expenses are the first deduction from your income because the rent needs to be paid, food has to be bought and children have to be sent to school. What’s left after this is your disposable income and this is when you need to promise yourself you will save first and spend later.
You need to save because you will not be earning forever, may not remain healthy forever but you will still need the money to pay for food and medical bills. What you save now will see you through the future. Saving your money will also help you in the not-so-distant future as it eases the burden. What’s left after this is the money you have complete control over and can spend it the way you like. This is the natural progression of using your money so make sure you don’t put the cart before the horse.
But how much should you save? Saving too much or too little both have a painful side to it. While saving too little will push you to a penurious future, saving too much may mean you are not fully enjoying the present. A balance is what is crucial and that happens when you invest your savings according to a plan. “Just setting aside some money for future is not enough. You need to have goals in mind so that you can work to a plan. Chalk out your goals and set time periods for each of these goals, this will help you decide your asset allocation," said Shyam Sekhar, chief ideator and founder, iThought.
For example, saving for retirement is a goal most people will have and given that for most it’s a long-term goal, you need an investment corpus that can beat inflation and equity is your best bet. According to Priya Sunder, director, PeakAlpha Investment Services Pvt. Ltd, even short-term goals like spending on festivities should be planned for in advance. “Diwali definitely sees a spike in expenses as people spend 1.5 to 2 times their average monthly spends. But if one plans for this in advance, one can spend without disturbing investments or cash flows," said Sunder. “One can invest in liquid funds as they often provide returns that are twice of what a savings account gives and since the money is not in your account you don’t spend it either," she added.
So if you find yourself spending all that bonus money on festivities, it’s time to take action and chalk out goals. Remember if you work towards a goal, your life become less taxing.
According to Suresh Sadagopan, founder, Ladder7 Financial Advisories, knowing where your money is going is key to understanding your spending pattern. “For most people their money life is sorted as long as there is money in the bank. Money troubles do not start only when there is no money left, it starts the day you are not able to figure out how your money is getting spent, this also means you are spending more on discretionary items," he said.
Keeping a full account of where you are spending your money is important if you want to discipline your spending habits. “Most people dream of becoming a billionaire but actually what they really want is to spend like one and as a result self-destruct their dreams," added Sadagopan. Also, do everything possible to keep track of where your money is going. For instance, instead of using multiple bank accounts for different spends, use only one account or don’t use multiple credit cards.
You need to stay humble in your financial life. But increasingly this virtue is getting tested at every nook and corner. Credit is now available on tap all year round: walk in to a retail outlet and walk out with a home theatre purchased on EMIs. Or simply cart it online on EMIs. What was unaffordable earlier is now within reach, thanks to easy credit, but remember it’s a vicious cycle. Future EMIs reduce your disposable income, putting pressure on your cash flows and pushing you further towards debt and a lifestyle funded by EMIs. “In the shadow of the festival, a lot of mistakes happen as people fall into the peer pressure and go overboard. This is a classic mistake. One needs to know that ultimately what’s affordable is what’s enjoyed over a period of time. It’s important to stay grounded," said Kalpesh Ashar, founder, Full Circle Financial Planners and Advisors.
So don’t try to outprice the gifts you get this Diwali or throw lavish parties if that means you have to max out on your credit card. Stay grounded and follow this mantra all year round.
Of course following the herd is a source of great comfort: you are not in it alone, and neither are you being left out. But every household operates on different dynamics and that extends to their money lives as well. Copying, therefore, doesn’t work and it’s important to check yourself from aping spending and investing habits of your friends, colleagues and relatives. “Don’t buy because the sale is on and everyone is shopping or don’t buy gold because traditions demand you to. You need to review your needs, your cash flows and your investments to make these decisions. Such decisions can’t be borne out of a herd mindset, but for that you need to remove the clutter from your head and stay grounded," said Ashar.
In fact, as per Sekhar, Diwali is good time to do something different. “Take action. If you have made mistakes, then work towards correcting it. Review your investments if you have never done that before, or take stock of your cash flows or understand your asset allocation or pay up your loans. Basically take small yet meaningful steps for a healthier financial future," he said.
We couldn’t agree more. As you prepare to welcome the goddess of wealth into your home this Diwali, make some money changes to your life to ensure your wealth and prosperity.